Demand For Indian Homes Falls Blamed By Loan Rates

As home loan rates soared from an average of 7 per cent to as high as 12-13 per cent., demand for real estate property decreased by nearly 25-30 per cent in the country over the last 18 months after the cut in Cash Reserve Ratio by the RBI, the developers are expecting the home loan rates to fall.

“The home loan rate in India is among the highest in the world and we expect it to be reduced by at least 100 basis points after the cut in CRR,” said Mr Pradip Kumar Chopra, Chairman, PS Group.

According to a study by the Associated Chambers of Commerce and Industry of India (Assocham), housing demand in small towns witnessed a 25 percent fall during February-July 2008 period because of higher cost of borrowing. The report said realty transaction has gone down by nearly 25 percent in most of tier II and tier III cities between February and July 2008. Assocham Secretary General D.S. Rawat said:

“Approximately 15 million people in about 30-40 tier II and tier III cities were unable to make purchases as higher inflation and interest rate have dampened their enthusiasm and eroded their budget.”

The Assocham study is based on feedback from affiliated real estate majors like Parsvnath, Omaxe, DLF, Unitech, and BPTP, which are developing projects in small towns. Besides rising cost, non-availability of inputs such as bricks, cement and steel, and power shortage also cause inordinate delays in project completion.

The chamber has urged the government to introduce real estate investment trusts (REITs) to bring the much needed class of institutional investors to strongly support the domestic real estate market. According to the Assocham, REITs can also help develop commercial mortgage backed securities (CMBS) market and create a source of cheaper debt for commercial real estate.

The recent move by RBI is expected to enhance liquidity to the primary and secondary real estate funding, while arresting further de-growth in real estate investments in the country. While banks had been reducing disbursements to the real estate sector over the last one and half years, the loans extended to “risky” projects dried up after banks fell short of liquidity, following the global financial crisis, Banks are funding real estate sector with caution only after a project is sanctioned and construction has started. Time will say whether the cut in CRR will have any positive impact on the sector.

Realtors, who are disappointed with this year’s budget, believe a cut in home loan rates is the only way to ramp up the demand for housing. High interest rates have drastically affected the growth of the sector. The growth is at 6 per cent compared with 30 per cent three years ago, when home loan rates were really low.”

Although average home loan rates at 7 per cent to 8 per cent were conducive for the growth of the sector, some economist predicts that it will not fall below 10.5 to 11 per cent. The rates vary from 9.5 to 12.5 per cent for loans up to Rs 20 lakh and 11 to 13.5 per cent for greater amounts. Real estate players are disappointed with finance minister P. Chidambaram for not renewing the income tax relief on the construction of affordable housing.

The benefit, which allowed builders to claim tax exemption on profits for making such small homes or flats, expired last year. Real estate players want the benefit to be revived to encourage middle and lower middle-class buyers of housing.

Real estate companies also complained that a hefty service tax on mall owners imposed in a previous budget had added to the higher pricing of flats. Analysts forecast that this service tax is ultimately a burden on end-users. It will add the extra expense incurred to the rentals. As a result, the cost of commercial space will become steeper and there will be fewer buyers.